New Rule Plugs Loophole in State Medicaid Funding : Health: Clinton had asked Bush to move quickly against practice that had cost U.S. billions of dollars.

At the request of President-elect Bill Clinton, the Bush Administration issued a tough regulation Friday to prevent states from using bookkeeping loopholes to collect billions of extra dollars from the federal government for Medicaid health costs.

The new rules are intended to bar states from using questionable tax and donation programs to force the federal government to give them more money for Medicaid, which helps pay the health care bills for 27 million poor people.

The regulation was close to completion when the President-elect asked Bush at their meeting this week to speed up the process. Clinton was worried about the budget impact of questionable programs in 45 states. Those programs forced the federal government to give the states an additional $8.5 billion in the past fiscal year.

The new regulation will reach a “balanced and equitable solution for the states and the federal government,” Health and Human Services Secretary Louis W. Sullivan said in a statement Friday.

California will not lose money under the new rules because it has not resorted to the questionable tactics, officials said Friday. But many other states could lose substantial amounts of money.

Medicaid is one of the fastest-growing government programs, with expenses rising in many states at more than 10%--far faster than the rate of inflation. It consumes an increasingly large share of the budgets in hard-pressed states, and their officials have found ingenious ways to tap Washington for more money.

The program is a shared effort. The federal government and the states each pay 50% of the total Medicaid cost in the richest states, such as California, where the system is called Medi-Cal. The poorest states pay just 22% of their totals, with Washington supplying the rest.

Officials emphasized that the federal government remains committed to helping the poor with their medical bills despite the crackdown on state efforts to get more money from Washington through questionable means.

“We trust that the federal matching funds will help states cope with rising Medicaid budgets, and permit them to improve services to the poor, disabled and medically indigent who make up this nation’s Medicaid population,” said William Toby Jr., acting administrator of the Health Care Financing Administration.

The loopholes typically involved donations or taxes. For example, a hospital would announce it was making a donation to state Medicaid funds, or a state would levy a special tax on hospitals or doctors treating Medicaid patients.

Under Medicaid funding formulas, these donations or taxes would be matched by federal government contributions. For instance, if a large state--with 50-50 arrangement on funding--raised $5 million through donations or taxes, it could claim and receive $5 million in additional federal Medicaid funds.

But in most cases, the donations and taxes were illusory--not real transfers of money. The states would allow the hospitals and doctors to recoup all of the donations and tax payments by raising the amounts they charged the states for treating Medicaid patients.

“The money made a loop from the health care providers (doctors and hospitals) to the state and then back to the providers,” said an official. “Along the way it picked up federal matching money for the state.”

These practices are banned by the regulations announced Friday, which implement a law passed by Congress in December, 1991.

“If the states pass good taxes, we can match them,” a federal official said.

The tax money or donations cannot be rebated to the hospitals or doctors by allowing them to charge higher fees, according to the new rules. If there is a tax, it must be “broad-based,” applying to all health care providers, not just those involved with Medicaid patients, an official said.

The thrust of the rules is to force the states to provide real cash, rather than “paper” donations and taxes for the Medicaid programs, a federal official emphasized.

Hospitals that care for large numbers of poor people also qualify for extra Medicaid funds. Some states were unfair in their generous definitions of such hospitals in order to get more money from Washington, according to federal officials.

However, the new rules limit federal spending at such hospitals to 12% of total Medicaid outlays.